Test Bank for Corporate Finance, 6th Canadian Edition by Jonathan Berk, Peter DeMarzo - All Chapters (1-31) Latest 2024 A+
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INSTRUCTOR’S SOLUTIONS MANUAL
Corporate Finance
Sixth Canadian Edition
Jonathan Berk
Stanford University
Peter DeMarzo
Stanford University
David Stangeland
University of Manitoba
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Chapter 1
The Corporation and Financial Markets
1-1. A corporation is a legal entity separate from its owners. This means ownership shares in
the corporation can be freely traded. None of the other organizational forms share this
characteristic.
1-2. Owners‘ liability is limited to the amount they invested in the firm. Shareholders are not
responsible for any encumbrances of the firm; in particular, they cannot be required to pay back
any debts incurred by the firm.
1-3. Corporations (all shareholders have limited liability). Limited partnerships provide limited
liability for the limited partners, but not for the general partners.
1-4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation,
separation of ownership and control.
1-5. The corporation that only holds real estate must pay corporate income taxes. The real
estate investment trust (REIT) does not pay corporate taxes but must pass through substantially
all of the income to the trust unit holders to whom it is taxable.
1-6. All calculations are on a ‗per-share basis‘.
corporate tax, there is $2 − $0.68 = $1.32 to be paid out as a dividend.
At the personal level, $1.32 is received as a dividend. Personal tax on
= $0.24. This leaves $1.08 after all taxes.
If the shares were held in a TFSA, there would be no personal taxes and thus the amount left
after all taxes would be $1.32.
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1-7. All calculations are on a ‗per-unit basis‘.
At the business level, no corporate tax will be paid as this is a REIT. Thus, there is the full $2 to
be paid out as a distribution.
At the personal level, $2 is received as a distribution from the REIT. Personal tax on the
distribution is
0. This leaves $1.20 after all taxes.
If the units were held in a TFSA, there would be no personal taxes and thus the amount left after
all taxes would be $2.00. So no taxes would be paid at either the business or personal level and
you would get to keep the full amount!
1-8. As the manager of an iPhone applications developer, you will make three types of
financial decisions.
i. You will make investment decisions such as determining which type of iPhone
application projects will offer your company a positive NPV and should, therefore, be developed
by your company.
ii. You will make the decision on how to fund your iPhone application investments and
what mix of debt and equity your company will have.
2 Solutions Manual for Berk/DeMarzo/Stangeland • Corporate Finance, 6th Canadian
Edition
iii. You will be responsible for the cash management of your company, ensuring that your
company has the necessary funds to make investments, pay interest on loans, and pay your
employees.
1-9. Shareholders can
i. ensure that employees are paid with company stock and/or stock options.
ii. ensure that underperforming managers are fired.
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iii. write contracts that ensure that the interests of the managers and shareholders are closely
aligned.
iv. mount hostile takeovers.
1-10. This will affect and hurt the customers. It will have a negative impact on the customers,
for they will likely get sour milk. It will also have a negative impact on shareholders because, in
the long run, customers will realize that the supermarket sells sour milk and will switch to other
supermarkets. Thus, the value today of the future income and cash flow streams generated by the
supermarket will drop because of the long-term loss of customers caused by this strategy. This
will negatively affect the current stock price as shareholders anticipate these long-term
drawbacks.
1-11. The agent (renter) will not take the same care of the apartment as the principal (owner),
because the renter does not share in the costs of fixing damage to the apartment. This problem
can be mitigated by having the renter pay a deposit and agree to share in the costs of fixing any
problems that are caused by the renter. Such an arrangement should motivate the renter to keep
damages to a minimum.
1-12. An ethical dilemma arises when the CEO of a firm has opposite incentives to those of the
shareholders. In this case, you (as the CEO) have an incentive to improve your pay and prestige
by buying another company, but the potential overpayment involved in the deal would be
damaging to your shareholders.
1-13. No. They are a way to discipline managers who are not working in the interests of
shareholders.
1-14. For each of (a) to (d), you must determine if your personal change in monetary wealth
more than offsets the value of the leisure time you would lose (valued at $51,000). If it does,
then you would decide to proceed with the new project.
a. If you owned 100% of the company and the project were accepted, your personal shares
of stock would increase in value by 100% of $1 million = $1 million. This would more than
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